The Supreme Court issued its opinion in S K Peightal Engineers, LTD v. Mid Valley Real Estate Solutions V, LLC on February 9, 2015. In that case, a developer built several homes on the Western Slope. He then suffered financial problems, and turned the inventory over to the bank, which titled the unsold residences in a newly created artificial entity. The homes then started showing distress which was claimed to be a result of design and construction errors. The supreme court granted cert on 1) Whether the economic loss rule bars a homeowner’s negligence claim against a construction professional when the owner is a commercial entity rather than a natural homebuyer; and 2) Whether the interrelated contract doctrine can apply to a wholly-owned subsidiary that did not exist when the initial contracts were drafted but instead was created after work on the relevant contracts had been completed.
The case has significance because the Supreme Court clarified the scope of the independent duty owed by construction professionals on residential projects. The bank entity had argued that it was in the same position as any other purchaser of the home, but the Court disagreed. It held that the independent duty imposed on construction professionals under Colorado law does not apply to the bank entity because, as a third-party beneficiary of a commercially negotiated commercial loan contract, the bank entity could not properly be considered a subsequent homeowner. Stated otherwise, parties or third-party beneficiaries of commercially negotiated contract that facilitated the home’s construction are not “subsequent home owner[s]” and thus there is no independent duty owed to them. As the bank entity could have negotiated protections under contract, the Court found it was not within the class of persons to whom the special duty under Colorado law was owed.
This was the first limitation of the independent duty owed by construction professionals since the duty was first recognized. In an amicus brief, we had argued that the special duty imposed on construction professionals under common law should be limited to unsophisticated home buyers who are purchasing residences without having been afforded the opportunity to protect themselves.